1. Enron was an American energy company.

They specialized in gas pipelines and had

exclusive rights of pipeline installation across the United States but lost it. Thus Enron
started venturing into energy trading instead. Towards its decline, Enron became an
energy, commodities and service company.

2. Like a crisis ridden in a broken family, Enron is having a contradicting and negative
principle-agent relationship. Simply put, the stakeholders (principle) of Enron wanted
young aspiring and out of the box young executives (agent) in order to bring the
company to the top of the pedestal. However, that is only the beginning to their
impending doom. The lads were blinded by greed to stack up their own wealth and
indirectly dragging along the principal falling to the dark abyss of failure. Agents
(executives) may not follow the principle interests. Therefore, conflict of interests
rises. Principle wants higher rate of return in their investments while the agents are
being greedy little pigs and never had enough. Summing up to the story, the agents
want their share in large chunks of gold.

3. Enron wouldnt suffer their heavy fall if its still operates normally. The loss of
exclusive rights to pipelines in 1985 during their cross country pipeline monopoly
made Enron looking for other sources of revenue. Its CEO Jeff Skilling that pushed
Enron into the business of energy derivatives, buying and selling gas. Enron was
showered with success and Enron made more risky investments and adopted a huge
profits at-all-costs approach. Skilling business ethics in Enron turned sour, as the
agents started to accrue as much short-term profits as possible. Financial records were
written with false information misleading the stakeholders (principles) into thinking
that financial reports were legit. With the lucrative investment returns they gained, the
principle didnt bother to care.

Arthur Andersens were dragged in on the deal. This created a transparency barrier as
they hid the financial details of the company from their own people. Questions rose at
Wall Street but Enron continued its evil agenda. It easy to fool people in a bull
market, but when it turned into a bear market in 2001, the scheme was exposed. The
dark side of their financial reports was unveiled to the mass. In a blink of the eye, the
company collapsed soon after.
4. One of the problems in a principle-agent relationship is that principles are always risk
neutral because it is their money that is at risk. While agents are risk averse. The
problem with Enron was that it did not limit their agent bonuses, thinking that this
would motivate the agents to perform. Unfortunately, it worked too well and the
agents knew that the riskier it gets, the higher the more payout gained. To avoid
kamikaze attitude by the agents, it was advisable to put a limit on the amount of bonus
that executives could receive.

In this case, the agents manipulated the financial information that they submitted to the
principles. This caused information to be falsified and misleading. Therefore, the
power of holding information should not be entitled and given easily as well as flow of
information should be transparent.

Finally, the authors stated that the principles of Enron failed to attach the agents to the
company longevity knowing that there were always a different agenda between
principle and agent. The principles should have done this by ensuring that the agents
own some bonus shares. This would make them have an aligned goal with the
principles and give them a think each time they make a corporate decision.

5. Avoiding principle agent problem is a must do activities in any organization. This is to

avoid or reduce the severity of conflicting interests between agents and principles. One
of the ways to overcome is by through a delicate head hunting done by the principle
itself. By doing so, they can find a suitable candidate that can fit to the principle mold.
 INDIVIDUAL ASSIGNMENT
Enron: an examination of agency problems

Prepared by: KHAIRUR RAHIMAN B REDZUAN HAFIZ BOON

Matrix No.: 2014341479

Class: AA7002CF

Course: Economics Analysis (ECO740)

Prepared for: Dr. Azlina Hanif